Whether a sale that transfers title to the patented item while specifying post-sale restrictions on the article’s use or resale avoids application of the patent exhaustion doctrine and therefore permits the enforcement of such post-sale restrictions through the patent law’s infringement remedy.

Whether, in light of [the] Court’s holding in Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351, 1363 (2013), that the common law doctrine barring restraints on alienation that is the basis of exhaustion doctrine “makes no geographical distinctions,” a sale of a patented article—authorized by the U.S. patentee—that takes place outside of the United States exhausts the U.S. patent rights in that article.

This post looks at the second of these questions.

Background

Lexmark manufactures and sells printers as well as toner cartridges. Being an international company (it is, after all, part of its name), Lexmark sells printers and toner cartridges around the world. For the toner cartridges involved in the pending litigation, some were sold by Lexmark overseas while others were sold in the U.S.

As most people are aware, Lexmark’s business model has focused on generating the majority of its profit from supplies such as toner cartridges rather than the printers themselves. Lexmark’s toner cartridges are the subject of numerous patents, effectively precluding competitors from selling new toner cartridges compatible with Lexmark’s printers. However, remanufacturers such as Impression Products acquire spent toner cartridges, refurbish and refill them, and sell those cartridges in competition with Lexmark.

In an effort to reduce competition from remanufacturers, Lexmark offered customers a “Return Program Cartridge” at a 20 percent discount compared to Lexmark’s “Regular Cartridge.” The cartridges are identical, but the Return Program Cartridges are sold “subject to a single-use/no-resale restriction: the buyer may not reuse the cartridge after the toner runs out and may not transfer it to anyone but Lexmark once it is used, i.e., the buyer must ‘return’ the cartridge ‘only’ to Lexmark.” Lexmark Int’l, Inc. v. Impression Prods., 816 F.3d 721, 727-728 (Fed. Cir. 2016).

Impression Products purchases spent toner cartridges that were sold by Lexmark in the U.S. and abroad. After refurbishing and refilling those cartridges, Impression Products sells the refurbished cartridges at a significant discount over Lexmark’s new cartridges.

Lexmark sued Impression Products for patent infringement, alleging infringement from: (1) the sale of refurbished Return Program Cartridges that Lexmark had sold in the U.S.; and (2) the import and sale of refurbished toner cartridges that Lexmark had sold outside of the U.S. (whether a Return Program Cartridge or a Regular Cartridge). The parties stipulated that Lexmark had an enforceable contract with its customers who purchased Return Program Cartridges—they were not permitted to transfer a spent cartridge to anyone but Lexmark.

Patent Exhaustion

The Supreme Court reaffirmed the doctrine of patent exhaustion in 2008: “[t]he authorized sale of an article that substantially embodies a patent exhausts the patent holder’s rights and prevents the patent holder from invoking patent law to control postsale use of the article.” Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617, 638 (2008). Thus, the first question to be addressed by the Court is whether patent exhaustion applies to a patented item that is sold subject to a single-use/no-resale restriction. While Lexmark has a breach of contract claim against any customer who transferred a spent Return Program Cartridge to a remanufacturer such as Impression Products, can Lexmark also enforce its single-use/no-resale restriction by invoking patent law? Is a conditional sale nevertheless an “authorized sale”? Although the Court of Appeals for the Federal Circuit (Federal Circuit) held that Lexmark’s conditional sales did not result in patent exhaustion, it remains to be seen whether the Supreme Court will agree.

As for the second question—whether patent exhaustion applies to patented item if the authorized sale takes place outside of the U.S.—this issue has never been addressed by the Supreme Court. In 2001 the Federal Circuit held that a foreign sale, even when authorized by the U.S. patent owner does not result in patent exhaustion. Jazz Photo Corp. v. ITC, 264 F.3d 1094, 1105 (Fed. Cir. 2001).

The facts in Jazz Photo are similar to those of Impression Products, albeit in the context of disposable film cameras. Fuji Photo Film Co. manufactured and sold disposable film cameras both in the U.S. and abroad. The defendants were importing refurbished Fuji cameras into the U.S., some of which were originally sold by Fuji in the U.S. and other that were originally sold by Fuji abroad. (The Jazz Photo case also involved the question of permissible repair vs. prohibited reconstruction, an issue beyond the scope of the present post.) The Federal Circuit concluded that although Fuji’s patent rights were exhausted for cameras first sold in the United States, exhaustion did not apply to the cameras first sold abroad. Therefore, importing those cameras into the U.S. infringed Fuji’s U.S. patents:

United States patent rights are not exhausted by products of foreign provenance. To invoke the protection of the first sale doctrine, the authorized first sale must have occurred under the United States patent. See Boesch v. Graff, 133 U.S. 697, 701-703 (1890) (a lawful foreign purchase does not obviate the need for license from the United States patentee before importation into and sale in the United States). Our decision applies only to [cameras] for which the United States patent right has been exhausted by first sale in the United States. Imported [cameras] of solely foreign provenance are not immunized from infringement of United States patents by the nature of their refurbishment.

Id.

In finding that there is no patent exhaustion for products first sold outside of the U.S., the Federal Circuit relied upon an 1890 Supreme Court case (Boesch v. Graff, 133 U.S. 697 (1890)). That case, however, did not involve a foreign sale that had been authorized by the U.S. patent owner.

In Boesch, the products in question (lamp burners) were purchased in Germany from a seller (Hecht) who had the right to sell the burners in Germany. But Hecht was not authorized to do so by Boesch (the U.S. patent owner). Instead, since Hecht had already begun preparations to manufacture the burners prior to Boesch filing his German patent application, Hecht was permitted to continue selling the burners in Germany despite Boesch acquiring a German patent. Boesch v. Graff, 133 U.S. 697, 701 (1890). Although the Court in Boesch stated that “[t]he sale of articles in the United States under a United States patent cannot be controlled by foreign laws,” Id. at 703, this statement has little to do with international patent exhaustion. Instead, this simply means that the fact that German law allowed Hecht to sell the burners in that country does not in any way affect the scope of Boesch’s U.S. patent rights.

While the Federal Circuit’s decision in Jazz Photo has been criticized, the Federal Circuit in Impression Products, sitting en banc, reaffirmed its conclusion that U.S. patent rights are not exhausted by a foreign sales of a patented product even when that sale is by the patent owner.

As for how the Supreme Court might rule on this issue, it is difficult to say. In Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013), however, the Court fully embraced international copyright exhaustion. The Court held that exhaustion (the “first sale doctrine”) applies to copyrighted works manufactured and sold abroad under the authority of the copyright owner. Such authorized manufacture and sale, even if done outside of the U.S., exhausts the copyright owner’s right to control the importation and distribution (i.e., sale) of such works. See our previous post on this topic here. In reaching this conclusion with respect to copyrights, the Court relied upon, among other things, the common-law roots of the first sale doctrine. But, while it might seem logical to assume that the Court will reach a similar conclusion with respect to patents, there are a number of distinctions between copyright and patent law.

For example, the first sale doctrine under copyright law is codified, and the Court’s decision in Kirtsaeng relied heavily on a literal (sort of) reading of the relevant statutory provisions. While the Court’s interpretation of the Copyright Act required some tortuous maneuvering due to contradictions within the statute, there is no such statutory roadmap for patents.

Furthermore, patents and copyrights are entirely different animals, serving different goals as well having vastly different procedures for ensuring protection. Under the Berne Convention, which has been adopted by 172 countries, copyright exists from the moment a work is created, without a requirement of registration.

Patents, on the other hand, require a lengthy and expensive examination process, and are only effective in countries where a patentee obtains a patent. Also, the standards for patentability, and even the types of inventions that can be patented, will vary from country to country.

Patents grant the patent owner the right to exclude others from making, using and selling a patented invention within the country of patent grant. In many instances this allows the patent owner to sell a patented item at a premium, since competition will be limited during the term of the patent. But, in those countries where the patentee is unable to obtain a patent (or where patent enforcement is virtually non-existent) such a pricing premium will not be available due to competition. In other instances economic factors may limit how much the patentee is able to charge for certain goods. Unlimited international patent exhaustion would disincentivize patent owners from entering many foreign markets due to the fear of its goods sold at a lower price overseas being imported into the U.S. for resale.

In part because of the issues noted above, many have proposed a modified form of international patent exhaustion. In particular, the dissenters at the Federal Circuit in Impression Products as well as the federal government in its amicus brief before the Supreme Court, have proposed that international patent exhaustion should apply unless patent owners expressly reserve their U.S. patent rights when authorized sales are made outside of the U.S. While this has some appeal, it is not at all clear how such a modified form of international patent exhaustion would be implemented. For example, would that reservation of rights apply to a subsequent overseas purchaser who did not contractually agree to the patentee’s reservation of U.S. patent rights?

Oral arguments are scheduled for March 21, 2017.

And, in a strange twist, in 2016 Lexmark was purchased by a consortium led by Apex Technology Co., Ltd.—one of the world’s largest manufacturers of printer cartridge components for refillers. In fact, not only was Apex’s sister company, Ninestar, one of the originally named defendants in the case now before the Supreme Court, Ninestar unsuccessfully petitioned the Supreme Court to overturn Jazz Photo in 2013.

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